Investors had some big questions heading into Target's (TGT -0.01%) first-quarter earnings report. Management had raised expectations a few months ago with its predictions of robust sales growth, improving profitability, and increased market share in the brutally competitive retail sector.
Target's actual results were impressive on each of those metrics, putting the chain on track to meet its 2019 guidance. In the earnings call, management doubled down on their prediction that Target's growth this year will outpace that of its top rivals both in stores and online. Below are a few key takeaways for investors to take away from that discussion.
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Beating expectations
Across both our stores and digital channels, sales growth continues to be driven primarily by traffic. Specifically, in the first quarter, comp traffic was up a very healthy 4.3% on top of 3.7% a year ago. -- CEO Brian Cornell
While the trends in retail were generally healthy this past quarter, there were headwinds that could have hampered growth, including price inflation and wet winter weather. Target navigated these challenges with ease and edged past management's aggressive forecasts for both its top and bottom lines. Comparable sales grew 4.8% compared to Walmart's 3.4% increase.
Many factors went into that outperformance, but one that was particularly important was the chain's improved merchandising across its house brand and national brand offerings. High-quality, competitively priced products in segments such as apparel, baby care, and home furnishings drove excitement in the e-commerce and in-store sales channels. "Guest traffic is the ultimate reward for our efforts," VP Mark Tritton explained.
Quick delivery has been a game-changer
Well over half of our digital growth was driven by same-day fulfillment options: in-store pick up, drive up, and Shipt. Put another way, these three services drove more than a quarter of our total company comps growth of 4.8%. -- COO John Mulligan
While customers are responding positively to Target's merchandise, they're even more enthusiastic about getting those products into their hands as quickly as possible. The chain's same-day omnichannel services -- which include the options of ordering online for in-store pickup or drive-up car loading, as well as home delivery -- led to higher guest satisfaction plus more store visits and higher spending per trip.
Keeping stores in the center of the strategy
For the second quarter, we're looking to deliver a low to mid-single-digit increase in our comparable sales. -- Cornell
Target's short-term outlook suggests that it foresees a slight growth deceleration over the next few months. Management blamed that on the fact that the next quarter will go up against a prior-year period that was lifted by the liquidation of Toys R' Us and Babies R' Us stores across the country.
Executives wanted to make clear that they still see a broad path toward significant market share gains in 2019 even as the retailer boosts profitability. That will mainly involve directing energy toward the strategies that have been successful for it over the past year or so, such as improving product quality and deploying fast, flexible fulfillment options.
Some observers have questioned the long-term viability of the chain's strategy of leaning on its stores to deliver most of its online orders, but at this point, Target executives see no need to change course. In fact, management believes same-day delivery services will help push online orders to above $6 billion this year, compared to $5 billion in 2018. They've also indicated that well over two-thirds of that volume will be fulfilled directly from customers' local Target locations. Thus, the chain will continue pouring resources into upgrading its stores, both to improve the shopping experience and to make them more efficient hubs for processing and delivering online orders.
